Despite a decline of raw materials, rubber remains a strong driver of Sri Lankan industry

Sri Lankan rubber has grown from humble roots as a small colonial export to the second most important plantation crop and one of the most successful value-added industries. One of the top rubber producing nations globally, Sri Lanka is also the world leader in solid tyre exports, while other niche products hold a sizable portion of the global market, considering the island’s relative size. This aside, challenges in recent years, both global and local, have weighed heavily on the industry’s expansion efforts. Record low commodity prices, rubber included, atop weak global demand have pressed export volumes, while low productivity has resulted in inadequate local supplies to spur manufacturing. A Rubber Industry Master Plan, launched in March 2016, aims to address many of these challenges, helping secure a vibrant industry well into the 21st century.

A number of entities have grown up alongside the industry. Sri Lanka’s Rubber Research Institute is one of the oldest research institutes dedicated solely to rubber in the world, with origins dating back to 1909, while the Rubber Development Department (RDD), under the Ministry of Plantation Industries (MoPI), was established in 1934. It is largely tasked with enforcing legislation governing the sector, registering rubber lands and owners, issuing licences, and distributing seeds, fertilisers and subsidies.

In Figures

Sri Lanka’s rubber industry comprises two distinct sectors – rubber plantation industries and smallholders engaged in natural rubber production, and an assortment of manufacturers specialising in value-added rubber products. Sri Lanka is in the top 10 largest producers of natural rubber globally, and the seventh-largest exporter.

At its height in 2011 Sri Lanka produced 158,200 tonnes of natural rubber, however this declined to 98,600 tonnes by 2014, with an additional drop expected in 2015, according to the RDD. Rubber trees have a commercial lifespan of 25-30 years and replanting in Sri Lanka is estimated to take place on around 3% of mature hectares a year, according to the Export Development Board (EDB). Though around 70% of natural rubber is absorbed by local industries, Sri Lanka exports latex, sheet rubber, technically specified rubber, crepe rubber and block rubber.

Largely in line with the global price drop, exports for rubber and rubber-based products have also been on the decline since 2011, when earnings reached a record high of $1.1bn. In 2012 earnings fell to $981m and further to $787m in 2015. In 2015 rubber and rubber product exports comprised 7.7% of Sri Lanka’s total export basket, compared to 10.8% in 2011. In 2015 the vast majority of rubber exports went to the US (32.5%), followed by Germany (10.7%) and Belgium (4.7%). Sizeable exports also went to Italy, Canada, the UK, Brazil, France, India and Japan.

Global Decline

Rubber value chains globally have been hit hard by falling commodity prices since 2011, with many analysts expecting weakened demand to weigh on prices through 2020. Much is due to lacklustre growth in China, the world’s biggest rubber importer, as well as a surplus in supply as tree mature in Asia, as Vietnam, Thailand and Indonesia have expanded their cultivation in recent years. Futures have fallen as much as 75% from a high of over $5 per kg in 2011, to below $1.50 in 2015. In Sri Lanka this has translated into accumulated losses for 19 regional plantation companies (RPCs) growing tea and rubber totalling LKR2.85bn ($20.5m) in 2014. A guaranteed price scheme employed early in the year, which excluded RPCs, promised a minimum-purchasing price of LKR350 ($2.52) per kg in order to protect smallholders from ailing international conditions.

Domestic challenges have also meant declining volumes of natural rubber production. Many cite productivity relative to the region as a concern. “Sri Lanka produces around 1100 kg per ha, while Malaysia produces upwards of 1500 kg,” Prabhash Subasinghe, managing director of Global Rubber Industries (GRI), a local manufacturer of solid tyres, and chairman of the Sri Lanka Association of Manufacturers and Exporters of Rubber Products, told OBG. “This implies there is significant scope to improve efficiency and yields on our rubber plantations.”

Productivity issues on plantations are not unique to rubber, and throughout 2015 wage negotiations with productivity stipulations remained a contentious issue between unions and plantation companies. Additionally, the rubber industry is experiencing a shortage of rubber tappers. A labour force survey conducted in 2000 showed 36% of workers engaged in agriculture, which had dropped to 29% by 2014.

The Plan

To combat the downward trajectory of the last few years, a national agenda for Sri Lanka’s rubber industry covering the years 2015-24 was presented to the government of Sri Lanka and the MoPI in May 2015. Produced by the Sri Lankan Society of Rubber Industry and the Rubber Secretariat, with technical assistance from the Asian Development Bank and funding from the Australian Agency for International Development, the Sri Lanka Rubber Industry Master Plan aims for a collaborative effort that syncs value chain activities with the global marketplace, and to nurture rubber into one of the top three export earners. The industry is targeting export volumes of $4m by 2024, skewed heavily towards value-added rubber product exports over natural rubber. By 2024 rubber will constitute around 2% of Sri Lankan GDP, with the projected share of exports rising to 15%.

The plan is defined by three strategic thrust areas, which includes garnering maximum productive value out of existing farms while expanding total acreage devoted to rubber, improving value-added niches in rubber manufacturing, and providing soft and hard infrastructure for industry expansion through regulatory support. While the key driver remains the expansion of rubber product manufacturing in country, as well as a push into export markets, the critical success factor remains the availability of raw materials. Indeed, the decline of natural rubber production has had direct implications for manufacturers, current capacity and future expansion efforts. “We already have to import natural rubber during periodic shortfalls, and this represents a major constraint on expansion efforts,” Subasinghe told OBG.

The plan aims to increase total production volumes to a peak of over 305,000 tonnes by 2046. It also aims to revamp replanting efforts to 4% per year, which will lower production volumes in the short term. However, productivity will be increased to 1042 kg per ha by 2024, and to 1806 kg per ha by 2046.

Niche Products

A number of product lines have grown into success stories for Sri Lanka. Perhaps greatest of these is the burgeoning solid tyre industry, which over the last few decades has become a global leader occupying at least 50% market share. Solid tyres are a relatively niche business, used primarily in forklifts of all sizes, often on cranes and in factories. They have largely begun to overtake cheaper pneumatic applications in recent years, growing into what Subasinghe estimates as a $1.5bn industry globally.

The market is dominated by some of the biggest names in the world, including Camso Loadstar and Trelleborg. A number of local players have also gained a strong foothold, including GRI, the country’s third-largest player, as well as Eu-Retec, a joint venture with Continental. Going forward, many industry players cite a growing market for off-highway tyres being produced in Sri Lanka, which would allow value chains to tap into a larger global market. As is stands, Sri Lanka as a manufacturing locale has built high brand equity for solid tyres in international markets.

Likewise, among other products, rubber glove manufacturing – including general purpose, industrial and to a smaller extent disposable gloves – has taken off in Sri Lanka, serving 5% of global demand, according to the EDB. Largest of these firms is Dipped Products, owned by Sri Lankan conglomerate Hayleys. Dipped Products exports to around 70 countries and operates manufacturing and marketing facilities overseas.